A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets
Review of Finance, Forthcoming
57 Pages Posted: 24 Sep 2020 Last revised: 18 Jan 2022
Date Written: November 12, 2021
We investigate the puzzle of widespread participation in cryptocurrency pump-and-dump manipulation schemes. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences can explain participation in these schemes. Analyzing a sample of 355 cases in six months, we find strong empirical support for both mechanisms. Pumps generate extreme price distortions of 65% on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants.
Keywords: market manipulation, pump-and-dump, cryptocurrencies, overconfidence, gambling
JEL Classification: G14, G41
Suggested Citation: Suggested Citation